This ETF Probably Won’t Be Your Golden Boy

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Key Takeaways:

• Some ETFs function more as trading vehicles than long-term investments. 
• Aim for ETFs with low expense ratios. 
• Pay attention to how many stocks an ETF owns and if it’s overweight a handful of names. 

First and foremost, subscribe to The Spill for free right now. 

In a recent installment, The Spill looked at the VanEck Gold Miners ETF and concluded it’s simply not worth your time, particularly if you’re a long-term investor. 

The reasons why help highlight some of the ins and outs of ETF trading and investing. 

Trading. One of the biggest differences between ETF and mutual funds is that you can day trade ETFs like stocks. You can’t do this with mutual funds. So, it comes as no surprise that this is what happens with quite a few ETFs, including, as The Spill notes, GDX:

GDX sees a considerable amount of action during the trading day. During an average session, 22.6 million shares will trade…

One reason why traders love GDX is the volatility and its low price. On any given day moves can range from 3% to 4%…

In other words, trading GDX offers greater risk and reward. 

What many folks don’t realize is that the GDX often precedes moves in the yellow metal. So it’s a great leading indicator for gold traders.

So, while GDX does track the long-term performance of the NYSE Arca Gold Miners Index, it simply has not performed well as a long-term investment. In fact, a $10,000 investment in GDX at its 2006 founding is worth just $7,000 today. 

Expense ratio. GDX isn’t horrible on this metric, however it’s certainly not one of the cheaper ETFs to own over the long haul, as The Spill illustrates: 

A good rule of thumb is to avoid ETFs that have an expense ratio higher than 1%. In GDX’s case, the expense ratio is 0.51%, which is not great when you compare it to the SPY which has an expense ratio of 0.09%, and the QQQ, which has an expense ratio of 0.20%.

At 0.51%, GDX’s expense ratio comes in higher than XBI’s, which is 0.35%.

Weighting. You probably shouldn’t say I want exposure to a sector – gold miners in this case – and buy the first ETF that comes up. Even though these types of ETFs track indexes, you might not be comfortable with their composition. 

The Spill implies this could be the case with GDX: 

There are 54 total holdings, but the top three positions consist of 34% of the ETFs weighting. Newmont Corp (NEM) is in the largest position, with a weighting of 15.6%.

There’s lots of red among the names GDX owns, specifically in its biggest positions. It might simply be that it just hasn’t been the right time for this sector and, with so many of GDX’s top holdings beaten down over the last year, you have a buying opportunity on your hands. 

This might be the case, however, The Spill points out an additional layer of complication: 

Typically when gold is hot, the miners outperform. On the flip side, when gold is trading sideways or bearish, the miners tend to underperform…

…we believe gold will have its moment, and its prices will rise if inflation worsens. 

If that does play out, GDX should do very well. Of course, it all boils down to timing and opportunity cost. 

And because the timing is so hard to nail, we think your money is better invested somewhere else.

The Bottom Line: There are straightforward ETFs, such as SPY and QQQ, and others that track less-volatile sectors, such as consumer stocks. These ETFs carry fewer layers to concern yourself with. 

Then, there are more complicated products, such as trading vehicles like GDX and even more complex leveraged ETFs. They serve specific functions for traders and simply don’t perform well – for a whole host of reasons – as long-term investments. 

As with any investment, you have to consider your resources – time and money – against your goals. While ETFs can help you achieve your investing goals, they’re not always straightforward slam dunks. You have to do some research. 

We hope our series helped you get your head around the basics and some ins and outs of ETF investing.

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